WASHINGTON, D.C. — The USDA net farm income forecast, released last week, shows 2015 will have the lowest net farm incomes since 2009, due mainly to lower commodity prices. But farm income is still above median U.S. household income, and farm financial positions remain strong overall, according to the USDA.

The August forecast reflects less optimism than February’s numbers. “It’s settling back at or near the 10-year average for net cash income,” said Mitch Morehart, USDA senior economist. Declining prices for row crops, pork and milk are responsible for much of that decline.

Production expenses will fall for the first time since 2009. But that good news for producers is offset by larger income declines. Crop receipts, led by a $7.1 billion drop in corn receipts, are forecast to decline by $12.9 billion from 2014.

“Production expenses are expected to decline less than gross farm income in percentage terms, leading to tighter margins,” said Morehart.

Income from some crops will increase. The value of tree fruit and nut production will be slightly more in 2015, as citrus growers receive higher prices because of shorter supply, mainly due to citrus greening disease. Drought in California will reduce receipts there from water-intensive crops such as rice and cotton. But the value of other California crops is holding.

“For California’s vegetable, berry and orchard production, the impacts from reduced off-farm surface water deliveries have been partially mitigated by increased use of groundwater,” said USDA.

Livestock receipts could fall more than 9 percent ($19.4 billion), thanks to drops in dairy and hog receipts. Higher labor and interest costs, more important expenses for dairy and hogs than some other sectors, are big contributors to the lower projections.

Beef producers face a different situation, said Morehart. “Cattle receipts are down slightly, but still remain strong relative to their recent history,” he said. Feeder cattle prices are also staying relatively strong going into the fall market.

Inventory and depreciation

The forecast predicts a bigger drop in net farm income as compared to net cash income. That’s due in part to a declining value of crops stored on farms. As crop prices decrease, the USDA projections assume crop inventory values decline.

“Our modeling of that says that it’s going to be a large negative inventory change, if a lot of people sell more production this calendar year to keep their cash flow strong,” said Morehart.

Depreciation also contributes to the lower net farm income forecast. High capital turnover rates, as farms replaced equipment rapidly over the past 10 years, resulted in a relatively higher value for capital like equipment. The USDA forecast assumes that capital will be replaced this year at a rate similar to the past five years. “That’s a non-cash charge that says you have to replace capital, but it doesn’t say how frequently or at what value,” said Morehart.

But farms this year – especially row crop farms – are apparently managing cash by replacing equipment less rapidly. Large tractor and combine purchases have slowed since last year. Annual unit sales of tractors, with 100 or more horsepower, are down 18.7 percent through July, according to the Assoc. of Equipment Manufacturers (AEM). Combine sales are even softer, according to the AEM – down 40.5 percent through July.

In its earnings statement released Aug. 21, Deere & Co. forecast its agriculture equipment sales down 25 percent for 2015. “John Deere’s third-quarter results reflected the continuing impact of the downturn in the farm economy, as well as lower demand for construction equipment,” said Samuel R. Allen, chair and CEO.

Government disaster payments are projected less in 2015, even with some continuing drought and payments for avian influenza losses. But total government farm payments will increase, from $9.8 billion to $11.4 billion. Lower crop prices result in higher payments under the new ARC and PLC crop programs.

The USDA also anticipates increases in the income category that includes crop insurance. “(Crop insurance) is not part of government payments. We report that as part of farm-related income,” explained Morehart.

That farm-related income number is up, from $10.4 billion to $11.6 billion. “So, we are projecting more income from insurance payments to occur in 2015,” he said.